Memorandum - is noncompete clause enforceable

Supreme Court of Ohio. ROGERS et al., Appellees and Cross-Appellants,

v. RUNFOLA & ASSOCIATES, INC. et al., Appellants and Cross-Appellees.

No. 89-1355.

Submitted Sept. 26, 1990. Decided Jan. 9, 1991.

Employees filed declaratory judgment action seeking clarification as to validity and enforceability of, and obligations under, employment contracts containing covenants not to compete. Employer filed counterclaim, seeking specific performance of covenants, injunctive relief, and damages. The Court of Common Pleas, Franklin County, held in favor of employees, and employer appealed. The Court of Appeals affirmed, but disagreed with trial court's finding that contracts were invalid. Motion and cross motion to certify record were filed. The Supreme Court, Douglas, J., held that: *** (3) covenants' restraints and resultant hardships on employees exceeded that which was reasonable to protect employer's legitimate business interests; and (4) covenants' geographical and time restrictions would be modified to protect interests of both employees and employer.

Judgment affirmed in part, reversed in part, and cause remanded.

Herbert R. Brown, J., filed opinion concurring in part and dissenting in part.

Sweeney, J., dissented.

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**541 The relevant facts in this case, for the most part, have been stipulated by the parties prior to trial.

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In 1971, Thomas Runfola, acting as a sole proprietor, began operating a court reporting service under the name of “Runfola and Associates.” In February 1977, Runfola incorporated the business and shortly thereafter, pursuant to an assignment agreement, transferred the assets and liabilities, including all rights and obligations under any employment contract, of the sole proprietorship to the corporation.

In 1972, while attending school, Rogers began working for Runfola. Rogers continued to work for Runfola after completing school, and on June 1, 1975, she signed an employment contract. On September 19, 1977, Marrone, at the age of nineteen, began working for Runfola and he also signed a contract. Marrone testified that Runfola indicated to him that if Marrone should ever become unhappy with the firm, he would not be held to the contract. At the time appellees filed their complaint, both contracts were for a term of one year and subject to automatic renewal.

Rogers' and Marrone's employment contracts contained a covenant not to compete.FN1 The covenants in each contract are virtually identical and *6 both preclude appellees from engaging in court reporting or public stenogra- phy as an employee or otherwise in Franklin County, for a period of two years. The covenant also bans appellees from ever diverting or soliciting any of Runfola's clients and bars appellees from ever using any client list, notes, transcripts, exhibits, files, records or any documents received by or on behalf of Runfola.

FN1. The covenants contained the following restrictions:

“(a) During the term of this Contract and for a period of two (2) years thereafter, * * * [Rogers and Marrone] will not engage in the court reporting and (or) public stenography business as an employee, sole proprietor, independent contractor, partner, joint-venturer or principal at any place within the limits of Franklin County, Ohio, without the express written consent of the Employer.

“(b) At no time shall the Professional ever divert, take away, attempt to divert or take away, or solicit any of the clients of the Employer, for * * * [their] own benefit or for the benefit of any other person or entity.

“(c) At no time shall the Professional ever take away or use, for * * * [their] own benefit, or the benefit of any other person or entity, any client lists, notes, transcripts, exhibits, files, records or any other documents, papers or items of any kind or nature received by the Employer, or by the Professional on behalf of the Employer, in any capacity.”

On April 28, 1988, appellees each submitted a letter of resignation to Dennis Mowery, the general manager of Runfola. Appellees met with Mowery and, among other things, expressed to him that they both had decided to terminate their employment.**542 At this meeting, Rogers and Marrone also agreed that in order to effect the transition, they would continue to work until their contract anniversary dates, and stated they were reasonably certain they would open their own firm locally. In response, counsel for Runfola sent letters to appellees reminding them of their agreements not to compete.

Rogers quit working for Runfola on May 31, 1988. On June 3, 1988, Runfola, by way of letter, informed Marrone that he accepted Marrone's resignation “effective immediately.”

On June 15, 1988, Runfola answered appellees' complaint and counterclaimed. Runfola sought specific enforcement of the covenant and requested that appellees be enjoined from violating its provisions. Runfola also alleged there was no way to accurately assess damages but estimated that they would exceed $100,000.

Trial was commenced on July 1, 1988. On August 2, 1988, the trial court held in favor of appellees and against Runfola's counterclaim. The trial court found that the employment contracts were unenforceable. In addition, the trial court found that even if the employment contracts were valid, the covenants contained therein were unreason- able.

Runfola appealed. The court of appeals affirmed the judgment of the trial court and found that the covenants were unreasonable. The court of appeals, however, disagreed with the trial court's finding that the employment contracts were invalid.

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DOUGLAS, Justice.

The primary issue we are asked to decide is whether the covenants not to compete contained within appellees' employment contracts are reasonable in light of the guidelines pronounced by this court in Raimonde v. Van Vlerah

(1975), 42 Ohio St.2d 21, 71 O.O.2d 12, 325 N.E.2d 544.

I

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*8 II

Having found that appellees' employment contracts are valid, we now turn our discussion to the covenants not to compete contained therein.

In Raimonde, supra, at paragraphs one and two of the syllabus, we stated:

“1. A covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer's legitimate interests. (Paragraphs two and three of the syllabus in Extine v. Williamson Midwest [ (1964) ] 176 Ohio St. 403 [200 N.E.2d 297] overruled.)

“2. A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.” (Emphasis added.)

Further, in Raimonde, we acknowledged that courts are empowered to fashion a reasonable covenant between the parties and, in so doing, they should consider the following factors:

“ * * * ‘[T]he absence or presence of limitations as to time and space, * * * whether the employee represents the sole contact with the customer; whether the employee is possessed with confidential information or trade secrets; whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; whether the covenant seeks to stifle the inherent skill and experience of the employee; whether the benefit to the employer is disproportional to the detriment to the employee; whether the covenant operates as a bar to the employee's sole means of support; whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment; and whether the forbidden employment is merely incidental to the main employment.’ * * * ” (Citations omitted.) Id. 42 Ohio St.2d at 25, 71 O.O.2d at 14, 325 N.E.2d at 547.

**544 [4] Keeping the foregoing factors in mind, we conclude that the restraints and resultant hardships on appellees do exceed that which is reasonable to protect Runfola's legitimate business interests. Geographically, appellees are prohibited from engaging in court reporting or public stenography in Franklin County for two years. Appellees are also restricted, for a lifetime, from soliciting or diverting any of Runfola's clients. Court reporting is a unique profession. Appellees attended school to become court reporters and have worked as reporters for most of their adult lives. Rogers' and Marrone's testimony indicated that court reporting is the only profession in which they have become proficient. Imposing such space and time restrictions is unreasonable and will create an undue hardship on appellees.

Although we conclude that the covenants not to compete create an excessive hardship on appellees, our inquiry, nevertheless, cannot end here. We must also determine whether some restrictions prohibiting appellees from competing are necessary to protect Runfola's business interests. The record reflects that Runfola played a large role

in appellees' development as successful court reporters. While employed by Runfola, Rogers and Marrone gained valuable experience in the business which included the use of computerized technology. Runfola invested time and money in equipment, facilities, support staff and training. Much of this training and support, undoubtedly, inured to the benefit of the appellees. Runfola also developed a clientele with which appellees had *9 direct contact. Appellees' assignments were taken under the Runfola name. Indeed, Runfola has a legitimate commercial interest to protect.

Thus, balancing the restraints and projected hardships on appellees with Runfola's interests, and upon the authority of Raimonde, we modify the restrictions as to space and time as set forth infra.

[5] Apparently, in 1988, soon after the trial court rendered its judgment, appellees started a court reporting business and, to date, are still in operation. Notwithstanding this, Runfola requests that we enjoin appellees from engaging in competitive activities with Runfola and that we remand the case to the trial court on the issue of damages. Runfola seeks to have appellees enjoined as of the date of our decision. Appellees, on the other hand, urge us to follow Moraine Industrial Supply, Inc. v. Sterling Rubber Products Co. (C.A.6, 1989), 891 F.2d 133, and Premix, Inc. v. Zappitelli (N.D.Ohio 1983), 561 F.Supp. 269, and find that an injunction would be extremely harsh or inappropriate because the restrictive period, by its own terms, has expired.

Upon balancing these competing interests, we find appellees' authority unpersuasive and conclude that the better view is to grant Runfola, in part, the relief sought. In Raimonde, supra, 42 Ohio St.2d at 28, 71 O.O.2d at 16, 325 N.E.2d at 548, this court held it was entirely proper for a trial court to enjoin an employee who breached a covenant not to compete “ * * * for three years from the date of the court's order * * * [and] [t]o hold otherwise would emasculate the clear intent of * * * Civ.R. 54(C).” (Emphasis added.)

[6] Therefore, we hold that appellees shall, sixty days from the date of this order, be prohibited for a period of one year from engaging in court reporting or public stenography as a business, as employees, or otherwise, within the city limits of Columbus, Ohio, and be prohibited for a period of one year from engaging in court reporting or the stenography business with any person, firm or other business entity with an office located within the city limits of Columbus, Ohio. Further, appellees shall, from the date of this order, be prohibited for a period of one year from soliciting or diverting any of Runfola's clients that have employed Runfola seeking advice, assistance or services. Finally, we remand this case to the trial court on the sole issue of damages. Upon remand, the trial court should determine what damages, if any, appellees have caused Runfola by disregarding the covenant not to compete, as modified, by this court.

Judgment affirmed in part, reversed in part and cause remanded.

END OF DOCUMENT